NYSE Owner Said to Buy Algo Technologies to Overhaul Market

By Matthew Leising and Sam Mamudi -
Apr 16, 2014

The New York Stock Exchange is due
for a tune-up.

That was the diagnosis after its new owner,
IntercontinentalExchange Group Inc. (ICE), examined the software known
as the matching engine that pairs buyers and sellers, according
to two people familiar with the matter. To modernize trading on
the 222-year-old market, ICE bought Algo Technologies Ltd., a
firm that claims to have the industry’s fastest matching engine,
the people said.

The system created by Algo Technologies, which was formed
in 2010 by executives with backgrounds in high-frequency and
quantitative trading, will drive NYSE’s U.S. stock and options
markets, according to the people familiar with the matter, who
asked to not be identified because the acquisition hasn’t been
publicly announced. ICE considers the current NYSE technology
outdated and slow, one of the people said.

High-frequency traders have become the de facto
facilitators of buying and selling in the $22 trillion U.S.
equity market, and their business models depend on reacting to
price movements as fast as possible. Those firms are some of the
best customers of exchanges, so the faster Algo Technologies
system could help ICE lure business away from NYSE’s competitors
Nasdaq OMX Group Inc. (NDAQ) and Bats Global Markets Inc.

Lowest Latency

ICE purchased NYSE Euronext in November, briefly
catapulting itself to first place in the rank of world’s biggest
exchanges by market value. While the crown jewel of the
acquisition was the London-based Liffe derivatives market, ICE
Chief Executive Officer Jeff Sprecher also picked up the New
York Stock Exchange, two other U.S. stock markets and two
options platforms.

Brookly McLaughlin, a spokeswoman for Atlanta-based ICE,
declined to comment on Algo Technologies. Shares of ICE rose 2.2
percent to $198.03 today, trimming their 2014 decline to 12
percent and giving the company a $22.8 billion market value.

Algo Technologies claims to have the industry’s lowest
latency, a term describing how long a matching engine takes to
process and complete requests to buy and sell. Its AlgoM2
technology takes 16 microseconds, or 16 millionths of a second,
according to the Algo Technologies website. That compares with
124 microseconds for London Stock Exchange Plc’s Millennium
platform, 138 microseconds at Bats Europe, 250 microseconds at
Nasdaq, and 500 microseconds for NYSE Arca, according to Algo
Technologies.

Needing Speed

The debate over the need for speed, and whether lightning-fast trading gives some investors an unfair advantage, has been
reignited by the March 31 publication of “Flash Boys” by
author Michael Lewis. In it, Lewis argues that high-frequency
traders, exchanges and broker-dealers have rigged the U.S. stock
market.

Regulatory and technological changes since the 1990s have
reduced trading profits for brokers, squeezing out humans. High-frequency traders have filled the void, becoming the primary
market makers that facilitate buying and selling. Faster
exchange computers can help high-frequency traders buy and sell
quicker.

Even as Sprecher tries to improve the NYSE, ICE has
explored ways to nullify advantages enjoyed by high-frequency
traders, according to a person with knowledge of the matter. He
offered to buy IEX Group Inc., the upstart trading platform that
serves as the hero in Lewis’s book, the person said. ICE not
only liked the firm’s technology, but also wanted IEX CEO Brad Katsuyama’s expertise, the person said.

Gerald Lam, a spokesman for New York-based IEX, declined to
comment.

HFT Background

ICE met with market operator PDQ Enterprises LLC, but
didn’t consider buying it, according to a person familiar with
the matter. Like IEX, PDQ has marketed itself as a haven from
high-frequency traders.

Keith Ross, the CEO of Glenview, Illinois-based PDQ, said
he met with ICE last year to discuss the structure of the U.S.
equity market. No transaction was discussed, said Ross, who used
to work for Chicago-based Getco LLC, a high-frequency trader.
PDQ was created by Christopher Keith, an NYSE official during
the 1970s and 1980s who served as the Big Board’s chief
technology officer.

The management team at Algo Technologies has deep ties to
high-frequency and quantitative trading. It was founded in 2010
by Hirander Misra, Rami Habib and Alexei Lebedev, who owned
stakes along with Algo Engineering LLC, a technology firm
specializing in algorithmic trading.

‘Ultra Low’

Misra had been chief operating officer of Chi-X Europe
Ltd., which began a trading platform that challenged traditional
European exchanges. He quit Algo Technologies in 2011, citing a
strategy disagreement. Bats Global Markets bought Chi-X Europe
that year.

Habib, who replaced Misra as CEO, has a doctorate in
computational fluid dynamics. He is a co-founding director of
AlgoSpan, a “provider of ultra-low latency ‘shortest path’
fiber networks that gives access to low latency market data and
execution,” according to a biography on the Algo Technologies
website.

Lebedev, an Algo Technologies director, has spent years
“applying his technical wizardry to high frequency trading,
developing a technological base for redundant low-latency
coordinated distributed systems,” according to the website.